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WASHINGTON—Companies working on Iraq reconstruction have been accused of padding their profits through an insurance scam, leading to a criminal probe and hurried changes in the way many contracts are handled by the U.S. Army, according to internal military documents obtained by The Associated Press.

The investigation of two companies located in Tikrit—Sakar al-Fahal and al-Jubori—led the Army Corps of Engineers to scour its records for evidence of fraud by other contractors hired with billions of U.S. dollars to help rebuild Iraqi infrastructure devastated by the war, the documents reveal.

Whether Sakar al-Fahal and al-Jubori were paid for insurance they never obtained is a matter now being examined by the Army Criminal Investigation Command. The documents don’t state the total amounts in question.

Congress is looking into the problem, too. Concerned that the U.S. is footing the bill for phony or overstated insurance payments, the House Oversight and Government Reform Committee is to hold a hearing Thursday with witnesses from the Corps of Engineers, the Pentagon and the State Department.

The session will examine allegations of abuse and waste in the procurement of insurance for federal contracts, says committee chairman Henry Waxman, D-Calif.

All contractors doing work overseas for the Corps of Engineers or any other U.S. government agency are required to insure their civilian employees, many of whom are handling dangerous jobs in hostile areas. The medical and disability insurance is called Defense Base Act coverage, a reference to the federal law mandating it.

Contractors get the coverage from private insurance companies, then they’re reimbursed for what they spend. The insurance costs are included in the price of the contract and passed on to American taxpayers.

The two companies under investigation have completed or are currently working on contracts worth close to $30 million, according to correspondence among Corps of Engineers officials. Three recent awards totaling $19.5 million carried an initial payroll of $410,000, the documents indicate. The insurance costs would have been about $30,000.

Although those figures may pale when compared with the more than $46 billion the United States has provided for relief and reconstruction of Iraq since April 2003, the problem could well be much bigger than just a few Iraqi companies.

Maj. Charlotte Rhee, a contracting chief with the Corps of Engineers’ North District in Iraq, decided last month to send letters to the hundreds of contractors doing business with the Corps seeking proof they properly acquired Defense Base Act insurance.

“This will be very labor intensive but it needs to be done,” Rhee wrote in an April 8 e-mail to Col. Michael Pfenning, the North District commander. For future contracts, the Corps has adopted a rigorous method for ensuring companies actually have the insurance.

Rhee put a hold on any payments to Sakar al-Fahal and al-Jubori for ongoing work. Her office is also calculating the amounts both companies claimed in insurance reimbursements on completed contracts.

Grant Sattler, a Corps of Engineers spokesman in Iraq, referred questions about Sakar al-Fahal and al-Jubori to the Army Criminal Investigation Command. Chris Grey, a command spokesman, said the command does not confirm or deny the existence of investigations.

Officials with Sakar al-Fahal and al-Jubori could not be reached by telephone or e-mail for comment.

Alarms went off shortly after the two companies were selected in mid-March by the Joint Contracting Command in Iraq to design and build a security network for an oil pipeline running from the town of Bayji to Baghdad, according to Corps of Engineers e-mail traffic.

Rhee’s North District office was made the contracting authority for the awards. Before the companies could begin the work, the office needed verification each had the necessary Defense Base Act insurance.

Both submitted letters stating that the coverage was being provided by the Continental Insurance Company, which is headquartered in Chicago. The Corps of Engineers has an arrangement with Continental so contractors can get insurance at set rates.

The cost of insurance is based on the type and a size of the contract. For construction work, $7.25 of coverage is required for every $100 of payroll. So for a project with a payroll of $200,000, a premium of $14,500 needs to be paid to cover employees who might be injured or killed while working under a government contract in a foreign location.